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When things get lean, it’s natural to want to tighten your belt and save money wherever possible. But should you stop investing completely? It’s an entirely personal decision. Get some facts and insights about investing during a recession below to help you determine what will work for you.
Is It a Good Idea to Invest During a Recession?
It depends on a few factors, including what you’re referring to when you say “investing.” If you’re talking about funding a 401(k), you probably want to continue doing so unless you would be unable to pay your necessary bills and living expenses.
But if investing means the stock market or other similar options, you should seriously consider your financial situation. If you already have emergency savings and have disposable income to risk, investing can be an option. This is especially true if you won’t be touching your portfolio for a while, so you have time to weather the ups and downs associated with a recession economy.
But you do want to be aware of the bear market trap so you don’t fall into it. Bear traps occur when a lot of investors have bought into certain stock. This increases the selling pressure, which just means that there are buyers for the stock but not a lot of stock to be had.
Institutions that want the stock to move higher may push prices lower via short sales or other strategies, making it appear as if the prices are falling. That can scare people into selling the stock. In the long run, however, the stock maintains its price or increases in value, so selling early can mean losing out on future gains. This is just one reason you might want to work with a professional advisor when investing.
7 Tips for Investing During a Recession
1. Be Patient and Think Long-Term
Buying and selling stocks rapidly to turn huge profits is mostly an event seen in movies and television. And while it’s not impossible for pros to luck into a big win, this is not typically how individuals should look at investing. It may take time for your investments to pay off, especially if the economy as a whole is struggling, so it’s important to avoid being guided by emotions and rely on logic and sound financial advice.
2. Commit to a Personal Investment Plan
A personal investment plan is a written document that includes your financial goals and what types of limitations you might have, such as what you can afford to spend on investing. Creating such a document ensures you have a logical, well-thought-out guide to turn to when things do get tricky. If you feel tempted by a seemingly perfect investment, for example, your plan can remind you what you can realistically put into this new investment.
3. Use the Dollar-Cost Averaging Strategy
Dollar-cost averaging is a strategy used by many investors, including some professionals. Its goal is to potentially reduce the volatile nature of a single purchase. The DCA strategy works like this:
- You decide how much you’re going to invest in certain assets within a set period
- You divide that budget over that time and make periodic purchases of the asset
- You do this despite the price of the asset at any given time
The goal is to build up the investment for a long-term gain strategy. This is actually how most 401(k) investments are managed.
4. Focus on Quality Over Quantity
But don’t think that you have to buy tons of assets to be investing for the future. If you have limited funds to invest with, it can be tempting to buy up stock that is cheap just to get some quantity. But cheap stock isn’t always a great investment, and it might be better to buy a smaller number of shares in a well-trusted company with a history of strong stock performance.
5. Consider Funds Instead of Individual Stocks
Another option is to consider funds, which spread your investment over numerous stocks. You’ve probably heard that you have to diversify your portfolio. That just means investing in numerous types of assets so that if one doesn’t perform well, you have other gains to make up for the loss.
A mutual fund is an investment option that’s already diversified, for example. Plus, it’s a convenient way to add numerous assets to your equity portfolio without buying and managing numerous stocks yourself.
6. Rebalance When Necessary
While investing is a long-term strategy, active investing can’t be a set-and-forget strategy. You have to make efforts to rebalance your portfolio—or ensure someone is doing that for you—from time to time.
Rebalancing just means aligning your assets with your target goals. For example, you might have a goal of 60% in stocks and 40% in other assets. But if your stocks gain rapidly during a few years, outpacing the gains of your other assets, you could have a 70/30 split. If your goal is still 60/40, you would rebalance by selling stock, purchasing other assets or both.
7. Invest in Recession-Resistant Industries
Recession-resistant industries are those that don’t tend to succumb to downturns in the economy, often because they’re necessary. Examples of industries that have historically weathered recessions well include healthcare, technology, beauty, retail, construction and pet products.
Note that because a company is in a recession-resistant industry doesn’t mean that company itself is necessarily resistant. It’s always important to be discerning about which stocks you invest in. For example, if the company doesn’t have strong financial leadership or has known money problems, it may not matter what industry it’s in.
Review Your Finances and Decide What’s Best for You
Ultimately, only you can decide whether investing during a recession is right for you. Start by reviewing your own finances. Some things you might want to look at include:
- What kind of savings you have. Having emergency savings is important, especially in a recession. Before you start investing, you may want to build yours.
- Your income and expenses. You need disposable income before you can invest. That means that your income should be more than your expenses.
- Your credit history. Buying stocks and investing typically doesn’t rely on you having good credit. But before you start building wealth, get a good look at your credit reports to ensure there’s nothing lurking that you might need to attend to. If you find any surprises, consider reaching out to Lexington Law for help disputing inaccurate items and working to make a positive impact on your credit.
And if you do decide to invest—during a recession or otherwise—consider working with a financial advisor to help you navigate the complexities of managing your portfolio.
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